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• EPS well above a year ago, significantly higher than expected
• Company generated cash flow of $167 million in the quarter

Lexmark International, Inc. (NYSE: LXK) today announced financial results for the third quarter of 2006. Third-quarter revenue was $1.235 billion compared to $1.216 billion last year, an increase of 1.6 percent. Third-quarter earnings per share were $0.85 and include $0.06 per share for share-based compensation expenses resulting from the company’s adoption of SFAS123R. Earnings per share would have been $0.95 excluding $0.10 per share restructuring related charges for actions announced in January.  Third-quarter 2005 earnings were $0.59, and included third quarter 2005 costs of $0.05 per share from a work force reduction.
 
“This was a good quarter for Lexmark. EPS were better than expected and we continued to generate solid cash flow.  We have more work ahead, but we continue to invest in the brand, market and product initiatives that support our long-term growth strategy,” said Lexmark Chairman and Chief Executive Officer Paul J. Curlander.

Third-quarter business segment revenue of $696 million increased 8 percent year to year, and consumer segment revenue of $539 million declined 5 percent compared to a year ago. Third-quarter results include restructuring related pretax charges totaling $13 million comprised of $4 million in cost of revenue and $9 million in operating expense. Third-quarter 2005 results included $9 million pretax work force reduction costs impacting operating expenses. 

Including 3Q06 restructuring related charges and 3Q05 work force reduction charges:
• 3Q06 gross profit margin was 32.6 percent, up from 29.4 percent in the same period last year.
• 3Q06 operating expense to revenue ratio was 23.3 percent, up from 22.6 percent in the same quarter last year.
• 3Q06 operating income margin was 9.3 percent, up from 6.8 percent last year.

Excluding 3Q06 restructuring related charges and 3Q05 work force reduction charges: 
• 3Q06 gross profit margin would have been 32.9 percent, up from 29.4 percent in the same period last year. This 350 basis point improvement was driven primarily by a change in the mix between hardware and supplies.
• 3Q06 operating expense to revenue ratio would have been 22.5 percent, up from 21.9 percent in the same quarter last year. This 60 basis point increase was due mainly to SFAS123R expenses and increased investment in research and development.
• 3Q06 operating income margin was 10.4 percent, up from 7.5 percent last year.

Third-quarter net cash provided by operating activities was $167 million. Capital expenditures for the quarter were $52 million. Lexmark repurchased approximately $130 million of its stock during the quarter.  The company’s remaining share repurchase authorization was about $600 million at quarter end.

Lexmark continues solid execution of strategic initiatives
During the third quarter, Lexmark continued to execute and make good progress on the brand, market and product strategic initiatives.

• The company launched a new television advertising campaign in the U.S. and other select markets, along with radio, print, outdoor and channel advertising and promotions in targeted geographic and market segments. The integrated campaign highlights Lexmark’s deep and proven experience in helping enterprise customers to be more productive while highlighting the opportunity for small and medium businesses (SMB) and consumers to benefit from Lexmark’s enterprise expertise.
• As part of its initiative to grow in SMB, Lexmark yesterday announced the Lexmark Fleet Manager (LFM) program which allows channel partners to leverage the proven power of Lexmark's enterprise service capabilities for their customers.  LFM is a managed print service offering that utilizes Lexmark’s tools and technologies but is delivered by channel partners.
• In addition, Lexmark yesterday introduced its new C530 family of color laser printers and new E series of monochrome laser printers to offer SMB and enterprise workgroups the next generation of performance, quality and reliability in order to increase productivity and reduce costs. Earlier in the quarter, Lexmark announced new C770n and C772n color laser printers and the X772e color multifunction product (MFP).  The Lexmark X5470 All-in-One (AIO) with Fax and Photo, which was also launched during the quarter, is a featured-packed four-in-one inkjet priced at $99 targeting the consumer segment.
• Lexmark continues to garner recognition for its products and programs from channel partners, technical press and testing laboratories. For example, VARBusiness, a leading channel publication, yesterday named the Lexmark X644e monochrome laser MFP as its 2006 Tech Innovator Product of the Year in the printing and imaging category, based on voting by channel partners and editors of the publication. VARBusiness named the Lexmark X342n monochrome laser AIO to its Best of the Mid-Market list (defined as companies with 100 to 999 employees) earlier in the quarter. Lexmark was also named Best Revenue Generator by channel partners at CMP Media’s largest channel conference of the year, marking the first time a vendor has won this award five consecutive times. Lexmark was selected from 140 vendors.

Looking forward
In the fourth quarter, the company expects revenue to be flat to down in the low-single digit percentage range year over year. It expects fourth-quarter 2006 EPS to be in the range of $0.70 to $0.80. This includes restructuring related charges of approximately $0.10 per share. EPS excluding restructuring related charges in the fourth quarter of 2006 are expected to be in the range of $0.80 to $0.90. EPS in the fourth quarter of 2005 were $0.71.
 

Conference Call
The company will be hosting a conference call with securities analysts today at 8:30 a.m. (EDT).  A live broadcast and a complete replay of this call can be accessed from Lexmark’s investor relations Web site at http://investor.lexmark.com.  If you are unable to connect to the Internet, you can access the call via telephone at 888-373-2605 (outside the U.S. by calling 973-935-2968) or the replay shortly afterward by calling 877-519-4471 (outside the U.S. by calling 973-341-3080) using access code 7959009. The telephone replay of the conference call will be available until 12 noon on Tuesday, October 31, 2006.  

Supplemental information slides, including reconciliations between GAAP and non-GAAP financial measures referenced above, will be available on Lexmark’s investor relations Web site prior to the live broadcast.

About Lexmark
Lexmark International, Inc. (NYSE: LXK) provides businesses and consumers in more than 150 countries with a broad range of printing and imaging products, solutions and services that help them to be more productive. In 2005, Lexmark reported $5.2 billion in revenue and employed more than 13,000 people globally. Learn how Lexmark can help you get more done at www.lexmark.com. 

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